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5 times you should always ask: How will this affect my taxes?

Considering the tax implications of key financial moves could save you money. Here’s what you need to know.


FROM INVESTING TO SELLING A HOME, even choosing a healthcare plan, we make big financial decisions all the time. But we don’t always ask ourselves: How will this affect my taxes? “People often travel across state lines to purchase big-ticket items where the sales tax is lower. Yet they’ll forget to consider the tax consequences when selling a stock or relocating in retirement,” says tax accountant Vinay Navani of WilkinGuttenplan.*


Checking in with your financial advisor and tax professional before making key financial moves throughout your life could save you a lot of money, he adds. Here are some examples of times when considering the tax consequences — and possibly adjusting your strategy — could make a difference.

Buying or selling a home

Most people are aware of the home mortgage interest deduction, generally applying to as much as $750,000 in mortgage debt, that’s available to homeowners. But did you know that you could take advantage of a capital gains tax exclusion on the first $250,000 of profit — $500,000 if you’re married and file jointly — when selling your primary residence?


“People often travel across state lines to purchase big-ticket items where the sales tax is lower. Yet they’ll forget to consider the tax consequences when selling a stock or relocating in retirement.”

— Tax accountant Vinay Navani of WilkinGuttenplan

Here’s the catch, says Navani. “You and your spouse, if you’re married, must have lived in the house for at least two of the past five years.” Still, it’s worth keeping in mind when considering the timing of a sale because with the maximum capital gains tax rate generally at 20%, that exclusion could save you up to $100,000, Navani says. The exclusion can’t be used if you excluded the gain from another home within the prior two years.


A move to consider: Suppose you want to sell your primary residence and relocate permanently to your vacation home in retirement, but you’ve lived in your primary residence for only one of the last five years. It might make sense to consider delaying your move for one year. Depending on the housing market, the value of your primary home could even appreciate during that time, says Aaron Shamshoian, wealth strategies advisor for Bank of America Private Bank.


Don’t forget: If you don’t want to wait that extra year, “you can still add the cost of home improvements you make before you sell to the cost basis of the home when calculating the amount of tax owed,” notes Shamshoian. The higher the basis, the smaller your gain — and the less you’d have to pay taxes on.

Paying for healthcare

When your employer’s enrollment period comes around every year, it’s worth checking to see if a qualifying high-deductible health plan is offered. When you enroll in a high-deductible health plan, you may be able to contribute to a health savings account (HSA). If you otherwise meet the eligibility requirements for an HSA, your contributions to an HSA are tax deductible, or they may be made by pre-tax salary deductions if allowed by your employer. Earnings and withdrawals for qualified medical expenses are federal income tax-free.


A move to consider: If your HSA allows you to invest the money you contribute, “its potential growth could help you pay for healthcare costs as you age and even cover the cost of Medicare premiums,” notes Shamshoian.


Don’t forget: The money you contribute annually to an employer-sponsored health flexible spending account (FSA) for healthcare expenses offers another way to lower your federal taxable income. Participating in certain types of FSAs may have an impact on your eligibility for HSA contributions.

Selling stocks and bonds

In most cases, there are tax consequences when you sell investments to realize gains. But not all investments are taxed at the same rate, notes Navani.


Bond interest and dividends from real estate investment trusts (REITs) are generally taxed as ordinary income at rates as high as 37%, he explains. Qualified dividends and gains from the sale of investments owned for more than a year are eligible for long-term capital gains rates, which currently are generally capped at 20%, plus an additional 3.8% net investment income tax for taxpayers with incomes above a certain threshold.


A move to consider: “Your advisor can help you think through the tax implications of where you hold different types of investments,” says Navani. “The general rule of thumb is that it’s better to have non-income-producing investments, such as growth stocks, in your taxable accounts, and to keep investments that generate income, such as corporate bonds and dividend-producing stocks, in tax-deferred accounts,” he adds.


Don’t forget: It’s possible to offset capital gains by selling investments that have dropped in value. “You can generally deduct up to $3,000 (or $1,500 if married and filing separately) of capital losses in excess of capital gains per year from your ordinary income,” says Navani. Any unused capital losses can be rolled over to the next taxable year.

Investing for retirement

Which makes the most sense for you: traditional 401(k) contributions or, if your employer allows for them, Roth 401(k) contributions? With traditional 401(k) contributions, your contributions are made on a pre-tax basis, giving you immediate savings by reducing your federal taxable income. In addition, investment income in your account is not subject to federal income taxes until money is taken out at retirement, when it’s taxed as federal ordinary income. With Roth 401(k) contributions, contributions are made with after-tax income, but then qualified withdrawals starting at age 59½ are potentially federal income tax-free.


A move to consider: “Choosing one over the other depends on whether you expect to be in a higher tax bracket now or when you retire,” Navani says. “One strategy,” he suggests, “is to split your contributions, contributing enough as traditional 401(k) contributions to limit your taxable income and keep from rising into a higher tax bracket, then putting the rest in as Roth 401(k) contributions.”


Don’t forget: Be sure to contribute enough to your 401(k) to earn the maximum matching contribution from your employer, Navani says. Because companies can allocate matching contributions only to a pre-tax account in your 401(k) plan, that means at least part of your money will be contributed on a pre-tax basis if your employer provides matching contributions. Your employer can match your Roth 401(k) contribution and place the matching contribution in a pre-tax account in your 401(k) plan but cannot put the matching contribution into your Roth 401(k) account.

Saving for education

Choosing to set aside money for your children’s education in a tax-advantaged Section 529 college savings plan is one of the easiest financial decisions you’ll ever make. Investment earnings within Section 529s aren’t taxed, and if the money is used to pay for certain college, private elementary or secondary school or other qualified higher education expenses, earnings also won’t be subject to federal income tax. However, not all plans are alike; it pays to shop around for the right plan for your situation.


A move to consider: States sponsor Section 529 plans, and many offer state income tax deductions for contributions from state residents. “But those deductions may be small,” says Shamshoian. “Other states’ plans may have better investment options and lower fees, and those could outweigh the tax advantage of choosing your own state’s plan.”


“Other states’ 529 plans may have better investment options and lower fees, and those could outweigh the tax advantage of choosing your own state’s plan.”

— Aaron Shamshoian, wealth strategies advisor for Bank of America Private Bank

Don’t forget: Grandparents can also establish and contribute to 529 plans that benefit their grandchildren, while removing the assets from their federal taxable estate. Additionally, due to a change in the Free Application for Federal Student Aid (FAFSA) that takes effect for the 2024-2025 academic year, withdrawals from grandparent-owned 529 plans will soon no longer negatively impact the student’s eligibility for federal financial aid as they did in the past.


This is just a sampling of the kinds of situations where you might benefit from being more tax aware, notes Navani. “Remember, too, that tax laws change frequently, and anticipating future shifts in tax rates and rules could help to influence the financial decisions you make today.” Your financial and tax advisors can help you keep tax strategies in mind as you make all of your most important financial moves.

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*As a CPA and shareholder at WilkinGuttenplan, Vinay Navani is not affiliated with Merrill or any of its affiliates. This article is for information and educational purposes only. Opinions and views expressed are his, do not necessarily reflect those of Merrill or any of its affiliates and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.


Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.


Investing involves risk. There is always the potential of losing money when you invest in securities. Past performance is no guarantee of future results.


All recommendations must be considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors.


This material should be regarded as educational information on healthcare and is not intended to provide specific advice. If you have questions regarding your particular situation, you should contact your healthcare, legal and/or tax advisors.


Before you invest in a Section 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider carefully before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.


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